Decoding blockchain, part 2: Travel loyalty programs

Depending on who you listen to, cryptocurrencies such as
Bitcoin, Ethereum, and Litecoin will either change fundamental aspects of people’s
daily lives – financial services, healthcare, retail and, yes, travel – or they’re
a sham, a prime example of much ado about nothing.

There is less debate, though, about the underlying system
that powers those cryptocurrencies: blockchain. While models are still being
developed and hypotheses tested, we’re starting to see consensus that
blockchain may provide a viable – and valuable – architecture to improve nearly
any system that relies on a transaction, whether that exchange is information,
or money or something else.

As part of this month’s focus on blockchain, we’re aiming to
unpack this abstract concept by sharing real industry examples of how this new
decentralized ledger system could be put into action.

For our second report we take a look at how blockchain could
change travel loyalty programs.

Background

If we think of loyalty program rewards as a currency, it becomes easy to
see why the current system is not ideal and why most programs are struggling to
achieve their ultimate goal: to influence travelers to buy from them again and
again.

“Travel loyalty programs, more so than other categories,
have become much more complex over time, less transparent, and more difficult
to use,” says Jessica McLaughlin Stansbury, a partner with Oliver Wyman
consulting firm.

“Most average travelers have a hard time accumulating enough
points to ever take advantage of the rewards anyway. As a result, a lot of points
go unredeemed, and travel companies don’t build loyalty. In fact, often the
complexity is counterproductive when it comes to generating loyalty, if
customers assume that the rules and lack of transparency are intended to
discourage them from ever using the benefits promised.”

In other words - the critical functions of a currency – the
ability for it to be earned and redeemed – are lacking for travel rewards,
diminishing the value members place on the rewards and ultimately weakening
their engagement with the hotels, airlines, online travel agencies and others
that offer such programs.

A July 2017 study by Phocuswright, U.S. Leisure Traveler:
Loyalty, found that two-thirds of
U.S. travelers participated in travel loyalty programs in 2016, and a majority
participate in multiple programs.

But time and again studies show that price - not loyalty
membership - is the primary factor influencing travel buying.

Blockchain solutions

Proponents of blockchain say this emerging system could change that.

Blockchain is a distributed, decentralized ledger that embeds transactions in digital code, so each action is secure, transparent and verifiable. The transactions are done with smart contracts that automatically execute based on defined rules.

This type of system opens many solutions that could benefit
both program providers and travelers, starting with speed of earning and
redemption.

“We are a generation of consumers that is used to Uber
telling us in a few seconds who our driver is, what time they are pulling up,
what it will cost and what route we will take,” says Thom Kozik, chief commercial officer at Loyyal,
which has created a blockchain-based loyalty and rewards platform. Prior to
joining Loyyal in January, Kozik was vice president of loyalty for Marriott
International.

“When I run across a loyalty program that says it will take
30 days for bonus points to show up in my account I have to wonder what the
heck is going on. And then it trickles into a negative brand perception of the
company behind that loyalty program that wow are they that archaic that it
takes so long to tell me something so simple.”

Kozik says younger travelers in particular – those coveted
millennials – value immediacy. And for travel rewards that means being able to earn
and redeem points quickly.

With a blockchain system, the smart contracts could be
designed to automatically load rewards as soon as a specified action takes
place, creating real-time capabilities for program providers and all of their
partners at once.

This capacity could be particularly valuable for
cross-promotions, for example hotel and airline loyalty programs that partner
to reward members who book with both brands. In the existing systems, “there’s
a whole lot of manual effort behind the scenes,” says Kozik and those bonus
points don’t show up in the traveler’s account until a month or more after the
fact.

“Because it’s on the blockchain, the smart contract embedded
in that transaction can see I just took the flight. And if I have a corresponding stay at my hotel
partner program, the moment it sees on that ledger that Thom has had that stay,
it can now instantaneously credit the combined bonus points,” he says. “You
don’t need manual intervention. And you’ve now bridged two different loyalty programs.”

Partner integration

By simplifying and automating rewards and redemptions, blockchain makes it
easier for programs to onboard new partners. Whereas it can take up to a year
to integrate new partners in existing loyalty systems, Kozik says blockchain
makes that a simple “click-through agreement… and now my members can earn or
redeem points with a new partner.”

Kozik shared the example of one of Loyyal’s customers, Emirates,
which has added a small Dubai-based ride-sharing service, Careem, to its
program.

“That ride sharing service may be of incredible importance
to several hundred thousand members of mine in the Middle East. But for me with
100 million members globally, [in the old system] it’s not worth the effort for
my IT department to do the integration and distract them from other work,” he
says.

“[With blockchain] I have a much faster route to put on more
lifestyle-relevant redemption and earned partnerships into the program that are
more relevant to even small microsegments of my customer base. And my members then
are becoming more loyal to my brand and my offering because it feels to them like
I’m paying more attention to them and their needs.”

Data sharing

Brands know that sort of personalization is highly valued by their customers.
The challenge is figuring out how to put the right offer in front of them at
the right time.

In a blockchain-based loyalty system, providers could access
the ledger to see the types of transactions a member is making – not just in
their program but across all of their partners as well – by viewing the
traveler’s “wallet” that could house points across multiple programs.

Access to this data would allow them to creating a much more
precise profile of that traveler and reveal opportunities to make offers customized
to their needs.

“I can simply look in your wallet and see you’ve redeemed points
for a hotel and a flight for the Grand Cayman Island. Now I can offer you a car,”
Kozik says. “I didn’t have to do anything inside the marketing systems of either
the airline or hotel to do that. I simply have my existing partnership relationship
that lets me see the data on the chain.”

Next steps

To make the conversion to blockchain more appealing to clients such as Emirates,
Loyyal has developed its system to live alongside existing rewards platforms.

“These big travel and hospitality companies are not going to
suddenly rip out infrastructure and turn it over to something they just starting
hearing about two years ago – blockchain,” Kozik says.

Existing partners in Emirates’ Skywards system function on
the old software, and new partners get added via blockchain. Kozik says he is
hopeful that within a few years the program will be fully managed on
blockchain.

“Loyalty program innovation is a massive area of spending.
Everyone’s looking at how they innovate, re-engage the consumer and keep them
loyal,” he says. “The number one thing that keeps coming up is the liquidity of
the currency and its relevance to that member’s lifestyle. And that’s what
blockchain can facilitate.”